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A significant deficit in the pension scheme is making companies an attractive target for hedge funds looking for opportunities to go short - a finding that will increase the pressure on companies to remove their exposure to pension liabilities.

Credit: Nigel Mykura

Thomas Cook, Dixon Retail, Mothercare and Premier Foods all have significant pension deficits, and all have above-average shorting positions, according to Data Explorers, which provides data on the stock borrowing market. Stock borrowing is part of short-selling: a hedge fund creates a short sale by selling stock that it has borrowed in order to make a profit if the share price falls.

More generally, Data Explorers said hedge funds are showing themselves more likely to take a short position in a company with a large proportional pension deficit, that is, a pension deficit that is large in comparison with the company's market capitalisation. Data Explorers has found that the 20 FTSE350 companies with the largest proportional pension deficits also have an above-average short interest: the short interest in their shares is 3.6%, while the average short interest across the FTSE350 is only 2.3%.

The company with the largest proportional pension deficit is Premier Foods. Its pension deficit amounts to three times its market cap.It has 4.2% of its shares shorted.

Thomas Cook has the second largest pension hole, at more than 2.5 times its market cap, although that number is massively exacerbated by the recent collapse in its share price. Thomas Cook's current short interest represents 10.3% of shares.

Dixon Retail, the third most shorted share in the FTSE 350 with a short interest of 13.4% of its shares, has a pension deficit representing 70% of its market cap. A chart of short interest and share price at Dixon Retail shows that, in May, hedge funds put on shorts amounting to 20% of the shares in May, and has since maintained this interest at between 13% and 20%; these short positions will have made their holders money, because over that period the share price of Dixon Retail has fallen by more than a third.

Mothercare, whose pension deficit amounts to 29% of its market cap, has short interest of 11.7%.

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Data Exploers said the rule was not cast iron. BAE Systems, Aviva and Invensys each have pension deficits amounting to more than 29% of their market cap, but short selling at these three companies is low.

Will Duff Gordon, a director of Data Explorers, said: "[Hedge funds] tend to focus more on how a company is trading rather than a structural weakness such as their pension deficit when judging their prospects. To a certain extent, the high short interest in firms with large pension deficits is a coincidental crossover. When the share price falls a long way, as is the case with many UK retailers this year, it clearly attracts short sellers seeking to profit from this decline. A side effect rather than a cause of the price fall is an increased pension deficit when judged against company value.

"However, an ageing population means pensions need to be paid for longer, while the volatile stock markets and low interest rates are making life extremely tough for those relying on a decent return on the assets held in their pension funds. This suggests that pension deficit issues may increasingly play a key role when forming judgements about a company’s future."

The trend will increase pressure on banks, in particular, because they typically have large pension schemes.